It is only possible to stake out political ground on the issue
of public finances because of the distortions surrounding them. The level of
government debt is rising. This is because the government is adding to its
annual levels of debt stock with new public sector deficits.

The actual trajectory of government finances, rather than Coalition
propaganda, shows that austerity has not led to a significant improvement,
certainly nothing like the promise to 'balance the books' in this
parliament. Government debt and the deficit have both deteriorated under
austerity. In addition the data on public finances actually show that the
opposite policy works. Investment (albeit in a very distorted form under
Osbornomics) leads to economic recovery and improving government finances.

This article will deal solely with debt and a further article will deal with
the deficit. There are two main measures of public sector debt used by the
Office for National Statistics (ONS). The first is Net Debt. But this is data
which includes the costs of the bank bailouts from 2008 and 2009. Therefore the
ONS produces a dataset on Net Debt Excluding Public Sector Banks. This is an
underlying measure of debt related to the real economy and government fiscal
policy.

These two measures have been moving in opposite directions. This is because
the amount of debt incurred in the public sector bailout of the failed private
banks has been falling. A large proportion of that debt has been repaid by the
banks. The two main measures of public sector debt are shown in Fig. 1 below.

Fig.1 Net Public Debt and Net Public Debt Excluding Public Sector
Banks

The last year of the New Labour government in 2009 recorded a level of Net
Public Sector Debt Excluding Public Sector Banks ('Net Debt excluding banks') of
£884bn. The same measure of debt has risen to £1,483bn by end 2014, and will
certainly be higher before the Coalition leaves office in May.

At the same
time the total Net Debt measure has shown a decline from a peak of £2,261bn in
2010 to an estimated £1,795bn at the end of 2014. This is because there has been
a repayment of over £1,000bn in the amount borrowed by the public sector to bail
out of the banks. The remaining discrepancy between the two main debt measures
is the amount still owed by these banks, a total of £308bn.

It is highly questionable whether all of these outstanding debts will be
repaid and there were certainly better uses for government funds than bailing
out failed bank speculation. Even so, the divergence in these two debt measures
should highlight two important facts. First, austerity has not led to an
improvement in government finances, the underlying level of debt has surged
under the Coalition.

Secondly, even the investment in failed and corrupt banks,
whose managers and traders continue to siphon off huge bonuses, has provided a
return to government finances. If the bonuses had been curbed and instructions
issued to lend to the most productive sectors of the economy then the return
could have been substantially higher. In solely the narrow and false framework
of government finances austerity fails to deliver improvement whereas even
misdirected investment does. Properly directed pubic investment remains the real
alternative to austerity.

The data does not support the Tory propaganda on public finances. The debt
has soared under austerity. The alternative of state-led investment has been
shown to work.